January is a great time to start thinking about taxes, and that doesn’t just mean getting your paperwork ready to file in April. The beginning of the year is when tax code changes take effect, and keeping track of these updates is the key to ensuring that next year’s tax season will come with minimal surprises.
Most of the 2023 tax changes that are going into effect this month are minor, but that doesn’t mean they’re unimportant. In fact, there are so many of these small changes that they can have a significant impact on your taxes and financial planning.
Here at Guiding Wealth, we know that it can be difficult to understand complicated tax code language. We’ve got a list of some of the most important tax changes and details on how they may affect your finances. If you’re not sure what (if any) adjustments you need to make to your retirement or savings plans, the best thing to do is follow up with a financial planner and CPA.
Retirement Contribution Limits
Most of this year’s tax changes, including a 3-cent bump to the mileage rate, are designed to help combat inflation. The IRS has increased the contribution limits for 401(k) accounts and other tax-deferred retirement plans, including 403(b) plans and the Thrift Savings Plan (for federal government workers). Also, the government has increased the income limits that determine eligibility for tax-deductible contributions to IRAs. Individuals should receive an official notice with details about their eligibility for IRA contributions.
In 2023, individuals can contribute up to $22,500 (up from $20,500) to their 401(k) or similar retirement plan. This 9.8% increase is the largest ever. Additionally, the IRS has increased the limit on catch-up contributions that individuals age 50 and over can make to their tax-deferred retirement plan. The new limit for catch-up contributions to 401(k), 403(b), Thrift Savings Plan, and most 457 plans is now $7,500. For SIMPLE plans, the new catch-up contribution limit is $3,500.
If you have an FSA (a healthcare flexible spending arrangement), you can contribute more to it in 2023. The new FSA contribution limit is $3,050, which is $200 more than the 2022 limit. The contribution limit for an IRA has also increased; it’s now $6,500 (a $500 increase over the 2022 limit). However, there are no changes to the IRA catch-up contribution limit; it is still $1,000.
Tax Brackets Adjustments
The IRS has also adjusted the tax brackets to help account for the significant amount of inflation Americans have experienced over the last couple of years. The IRS provides a complete list of 2023 tax brackets that you can use to plan ahead for filing taxes in 2024.
Additionally, the standard deduction amounts have increased for single taxpayers and those who are filing jointly as a married couple. The new standard deduction for individuals is $13,850 (a $900 increase). For married couples, it’s $27,700, which is an increase of $1,800 over the 2022 standard deduction.
Increases to Required Minimum Distributions Age
There are also some changes to retirement accounts. Specifically, the IRS has raised the age for required minimum distributions (RMDs). The required minimum distribution is the amount of money that you must withdraw from your retirement account annually to avoid paying excise taxes. As of January 1, 2023, the new age for RMDs is 73 (previously 72). Depending on when your birthday is, this new rule may affect when and how much money you need to pull from your retirement account.
Small Tax Changes Have Big Consequences
Chances are your finances have been impacted in some way by the historically high inflation that’s marked the post-COVID era.
Fortunately, most of the 2023 tax updates are designed to minimize the way inflation impacts taxes. Increases to the standard deduction amounts, tax brackets, and retirement contribution limits are seemingly small changes that can have a significant impact on your overall financial picture.
Taxes are complicated, especially when it comes to retirement planning. If you aren’t sure how these changes are going to affect your retirement savings or distributions, we can help.
At Guiding Wealth, our team of financial professionals can help you understand your financial situation and how tax changes affect it. A Certified Financial Planner™ can help you update your contributions or retirement plans based on several factors, including taxes, inflation, and market conditions. To get started, schedule a consultation online or call us at 214-810-3835.